The financial headlines are grim, but every cloud has a silver lining, right?
That old adage is being severely tested these days, but we did manage to unearth a handful of positive developments, optimistic commentators, and growth opportunities. True, there aren’t a lot of stops on the Good News Tour these days, but here are a few positive developments to contemplate as you wait for the clouds to lift.
The Savings Rate Should Increase
The slowdown in consumer spending is actually a good thing. While often decried as an accelerator of the downturn — which it surely is — the pullback in consumer spending will benefit the economy in the long term. Consumers have been on a shopping spree for two decades, and household savings have suffered. In 2007, the household savings rate was 0.6 percent. In some recent quarters, the rate turned negative, indicating that people borrowed more than they saved. As a result, many families have very little cushion to protect themselves from the vagaries of life. And, even disregarding the recent damage wrought on 401(k)s, a staggering number of people have not put away enough for retirement. At the same time, their ability to invest their savings in U.S. businesses by buying bonds and stocks has dwindled. Instead, U.S. business growth has become highly dependent on foreign investors, whose willingness to send funds to these shores could fade at any time.
“Consumer spending needs to slow down,” says Matthew Slaughter, professor of international economics at the Tuck School of Business at Dartmouth. “It’s a really important long-run structural issue for the financial health of families and the economy. More savings means companies can undertake more investment to drive faster economic growth.”
Cheap Is Cool
Bargain-priced consumer staples are back in vogue. Saks and Neiman Marcus had an extended bull run; now discounters are getting their turn. While people may switch to a cheaper shampoo, they aren’t going to give it up altogether.
Ruthlessly efficient low-cost providers will likely do well. “Wal-Mart should continue to be a primary beneficiary of consumers trading down during the current recession,” writes William Blair analyst Mark Miller in a recent note to clients in which he also praised the company for its improved execution. Indeed, the discount giant saw third-quarter earnings rise by nearly 10 percent. Family Dollar is one of the few other companies having a good year, with its stock up 40 percent heading into the holiday season.
Warehouse stores are another likely winner. BJ’s Wholesale Club reported a 10 percent increase in same-store sales for the month of October. JPMorgan analyst Charles Grom called BJ’s “one of the few bright spots in retail,” noting that consumers “continue to trade down, consolidate trips, and look to maximize dollars spent through the warehouse-club channel.”
Among manufacturers, those that help others make things faster and cheaper are finding themselves in demand. In one such example, industrial laser producer IPG Photonics reported a 29 percent jump in third-quarter sales compared with the same period last year. IPG also boosted gross margins and saw strong sales in all of its geographic markets, a feat the CEO attributed on the company’s earnings call to the “disruptive nature” of its technology — lasers for cutting and welding that can help manufacturers reduce costs.